Saturday, August 04, 2007

Tax Free in NC [But Only This Weekend]

This weekend is North Carolina's Sales Tax Holiday on certain items. The items that are sales tax free are typical back-to-school sale item: clothing, footwear, school supplies and even computers worth up to $3500. The state began doing this about 5 years ago. Initially, I thought it was a little silly. Who's gonna' get excited about a 7% discount for 36 hours? Turns out--lots of folks in this state do! In fact, this one brief weekend will often serve to make up for a bad weekend at Christmas time for retailers. Some retailers take advantage of the buying mood by joining end-of-season close-outs with this promotion. I even stocked up on unmentionables because of it.

Five years into this promotion, I was wondering why my state doesn't notice how much "tax savings" creates other revenues for the state. When I first moved to Carolina, the sales tax rate was about 5%. It's been creeping up pretty steadily [the bumper sticker reads Governor Easley too easily raises taxes!]over the past several years and now it's a whopping 7% on most items. Oh, and we also have a pretty hefty state income tax, too. How do other states get their revenue? And why doesn't this one little weekend inspire the NC legislature to tackle some major reform?

Chepe Noyon: I believe there are many folks who wait to buy the tax exempt items, but not every item is tax exempt and, while they're at it, they buy those, too. Retailers really make a big deal about it. The school items can be sold at full retail and still there's a 7% discount to the buyer. It's a little Christmas volume in August, which certainly strengthens the bottom line of the retailers, who pay tax in the form of corporate income tax.

So the tax break acts as a little incentive to buy certain items which trickles down to anything retail.

As a sidenote: I had an Army co-worker who noticed how people stationed in Korea "saved" themselves into the poorhouse while stationed there for a year. So many good deals, you feel bad passing them up...

Hold on. If Joe Consumer spends an extra $1.00 because of the lack of sales tax, then the retailer makes an additional profit of, at most, two or three cents -- retailing being a business with extremely thin margins. That extra two or three cents provides the basis for increased corporate tax. If the state is taking, say, 20% of corporate tax (an extremely high tax rate), then the state is getting about half a cent of additional revenue. But they could have gotten 7 cents of revenue from the original sales tax. Hence, the 7% reduction in net price has to generate more than 1000% increase in sales to be revenue neutral. That sounds like an unrealistically high number to me -- and I used very generous assumptions to calculate it.

Chepe Noyon: Haven't you forgotten that the retailer makes the exact same amount on the item that, for this weekend, is tax exempt? So for the retailer, the tax savings causes people to buy that item this weekend. The only one who's out is the state of NC. But consumers who are already in the store, in a buying mood, are going to spend more than just a dollar or two extra. It's a seasonal shopping event.

My girlfriend and I are planning a little outing tomorrow just for shopping. But we're not only going to get tax exempt items, that's just the impetus for our outing. We're also doing lunch out together, which is not exempt, but will get taxed at the full 7% too. And we'll tip a waiter or waitress who will probably be buying something more.

All I'm saying is that lower taxes free up spending. It's obvious and the state of NC should take note and act accordingly. You know that tax cuts mean increased revenue in the long run up to the point of diminishing returns, which we are nowhere near.

You know that tax cuts mean increased revenue in the long run up to the point of diminishing returns, which we are nowhere near.

No, I don't agree with that. This is a variation on the Laffer Curve concept, and there is merit to the concept -- but in practice, the peak of the curve is tricky to locate. It's easy to simply declare that the peak of the curve lies at lower tax rates -- but you can just as easily claim that the peak of the curve is at higher tax rates, too. It turns out that there is simply no way to know where the peak is.

I'll also point out that the Laffer curve (the concept is known more generally as "supply side economics") is usually applied to income tax, the rationale being that high income tax rates discourage wealth-creating labor. But that doesn't apply at all to a sales tax. If the sales tax is too high, then people simply buy less stuff. What do they do with their money then? Well, a few stupid people will put their money under a mattress, but most will invest it -- and such investment definitely expands the economy, generating more wealth and therefore more tax revenue.

All in all, I really don't think that a reduction in sales tax, either temporary or permanent, will lead to a net increase in tax revenues.

Chepe Noyon:I am interested in hearing more about income tax reduction because I suspect you're right about sales taxes.

We've had a national income tax for almost 100 years. I would like to see the income tax go to a flat rate [10-13%] and all other deductions [mortgage interest, charitable contributions, and, and, and] eliminated. If income were taxed at a low flat rate from dollar one, I wonder what impact that would have on the national revenues?

Why pragmatic? Eventually people are going to get upset that the rich are getting richer and the poor are getting poorer (as the stats show). It's likely that they'll eventually vote for a party that will raise the median income.

I agree that income tax is in need of drastic revisions, but my concern is with the swamp of special exemptions and loopholes that have built up over the years. A flat tax would sweep away all of those, which is great -- but if we're going to do any sweeping, then I would prefer to sweep away all the baggage and retain the basic notion of progressive taxation. My objection to the flat tax is that it fails to address the social costs of a high Gini index.

If you want to get really wild about tax policy, consider this: a tax on environmental harm. Instead of taxing a person's income or wealth, you tax them on the amount of damage they do to everybody else's air, water, and so forth. Most such taxes would be levied on the producers of environmentally damaging products, such as gasoline, and would simply be passed on to the consumer in the form of higher prices. I believe that Germany already has a tax on product packaging based on the costs of disposal -- this is an example of the kind of taxation I'm thinking of.

The underlying philosophy of such a tax can be found in the classic question, "Have I left the world a better place than I found it?" An environmental tax would insure that each person pays something for the damage they do.

My friend OSO, once again your are looking atht the left and massively oversimplefying.

Taxation stifles the economy. This is a fact. JFK proved that one and He was a Liberal Democrat. The more money that is pumped into the economy, the better off we all are.

Also

What do the "Rich People" do with their money. Scrooge McDuck' s money vault doesn't exist. Rich people put that money back into the economy by buying or investing, hence creating Jobs. TAke away their profit and you remove the incentive for them to take risks and build new economic activities.

Incentive -- That's the one point that the Socialists do not factor into their argument.

Mr. Flomberg, I agree that overall tax rates are too high and that a reduction in overall taxes would probably be beneficial to the country as a whole. However, I have two additional points for you to consider:

1. The government is still responsible for a great many costs that cannot be properly addressed by private enterprise. The recent bridge collapse shows what happens when government does not spend enough money on infrastructure. I understand that government spends a great deal of money on wasteful projects, but there remain SOME expenditures that are necessary. A dollar diverted from infrastructure expenditures to private enterprise would then be badly spent.

2. Done properly, redistribution of wealth from rich to poor can be the most cost-effective means of preserving overall wealth of society. I know that this sounds surprising, but the fact is that income differences are responsible for a great deal of social conflict, one small aspect of which is crime. At some level of spending, a dollar simply given to the poor accomplishes more than a dollar spent on police, courts, jails, and so forth.

Now YOU'RE over simplefying. The expectations of good behavior that we place on ourselves, our kids, and others will stifle the level of crime far more than giving money to the poor. Poverty does not translate to crime, bad moral upbringing does. Poverty is just a lame excuse.

A flat tax for everyone would not necessarily continue this alleged disparity between rich and poor as it would continue to free up money that would be spent elsewhere stimulating the flow of currency throughout the economy. Taxing the wealthy more harshly won't entirely negate those qualities which made them wealthy in the first place, but giving money to those who never develop those qualities won't magically inject them with it.

The underlying point of this thread is how the tax free weekend alters the shopping behavior of the poeple. If it can alter the behavior in this manner, smart manipulation of the tax codes will also alter the behavior of the public. The short lived luxury tax really kinda proved that. Cigarette taxes also prove it as it causes folks to quit, cut down, or cross the border into a more tax friendly county or state. But the most important aspect is that taking more and more money from the people who have it, only makes them seek ways to prevent that money from being taken. Revenues are then hurt drastically once that happens.

Marshall Arts accuses me of oversimplifying by observing that poverty is a factor in crime. But the relationship between poverty and crime is a well-established one, and has been suspected for centuries and recently proven by statistical methods. Blaming poor people for moral weakness is silly.

You have it exactly backwards when it comes to the velocity of money through the economy. The poor spend their money immediately, pumping it right back into the economy immediately. The wealthy divert some of their money to conspicuous consumption (expensive art, antiques, jewels, and so forth that doesn't stimulate the economy). Even the money that is invested tends to re-enter the economy only after a delay. Therefore, if it's velocity you want, give it ALL to the poor!

Yes, tax policy definitely influences personal behavior. It doesn't control it, but it can influence it. And in fact, taxing people for being economically successful *is* bass-ackwards. That's why I prefer to tax on the damage one does to society. And again, I too would like to see taxes lowered overall. I can think of one extravagance we can well do without: $12 billion a month spent in Iraq... cutting that would yield a tax savings of $500 a year for every man, woman, and child in the country. You can't cut taxes if you don't cut spending!

Mr. Flomblog, you offer an ideological statement against redistribution of wealth. That's fine, but have you any non-ideological arguments against the point I make concerning the merits of wealth redistribution in reducing the overall costs of crime?